WM Market Reports

Experiences Trump Luxury Goods For Millennials; Prices Edge Higher - Julius Baer

Tom Burroughes, Group Editor, 19 October 2017

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A report on the luxury goods and services market in Asia shows a generally buoyant picture - with some local variation, and argues that some angst about economics and politics must be set in perspective.

Millennials who fall into the high net worth category are more likely to spend on what they think of as exclusive experiences rather than items such as Swiss wristwatches, fast cars or sumptuous houses, according to a Julius Baer report on Asia wealth trends. 

The Zurich-listed lender, which says Asia is its second home market, reports that its customised index of luxury spending shows continued growth in this market across the region.

This population cohort lives in an “age of plenty” but is also scarred by a decade of economic and political turmoil that tends to encourage more focus on quality of experience and less on material possessions – at least up to a point, the Swiss bank says in a 70-page report. 

The bank said its Julius Baer Lifestyle Index for 2016/2017 Index rose by 2.07 per cent in local currency and 1.42 per cent in dollar terms. This kept pace with regional inflation trends suggesting luxury retailers managed to retain pricing power for so-called Veblen goods – luxury goods that do not follow the usual laws of supply and demand.

“Our index remains on an upward trajectory since its launch seven years ago, demonstrating that there remains enormous demand for luxury goods and services in Asia, notwithstanding short-term asset price fluctuations,” the bank continued. 

The index measures the cost for a basket of goods and services typically consumed by HNW individuals in Asia. The bank said to capture changing preferences and those of Millennials, it added fine dining (“degustation menu at a top-rated restaurant”) as a new item to its index which brings the number of goods and services tracked to 22.

As far as fine dining is concerned, Hong Kong is the most expensive city in Asia a cost of $287, followed by Singapore ($283) and Shanghai ($280). On the other hand, the lowest such fine dining meal is in Mumbai. Across all Asian markets measured, the average price has risen by 1.2 per cent from a year ago. 

Examining underlying forces at work, Julius Baer said 13 out of the 22 items measured saw price increases. Among the falling prices, university fees fell by 4.3 per cent as the dollar-equivalent cost for one of its executive programmes in the UK fell because of the large fall in sterling after the UK’s Bexit vote in June 2016. In local currency terms however, the UK programme had marked its costs higher by 4.9 per cent.

Several trends have driven prices higher, Julius Baer said, such as returning consumer confidence in China, and customers “reshoring” the luxury purchases they once made on overseas trips back home. The third factor is Asian currency movements, the bank said. 

Switching to the example of business class flights and price trends with flights from 11 Asian cities to New York and London, there was a mixed picture over the past 12 months, the report found. On average, prices declined 1.5 per cent in dollar terms. Flights departing from Manila in the Philippines fell the sharpest, down 25.2 per cent, while Singapore’s fell by 13.1 per cent. The heaviest increases were from Seoul in South Korea, up 25.2 per cent, and Taipei in Taiwan, up 15.8 per cent.

Turning to real estate, property prices remain the highest in Hong Kong, Tokyo and Singapore while they are least expensive in Jakarta, Bangkok and Manila. On a per square metre basis, the average cost for prime real estate in Asia this year stands at $19,151, with the mantle for most expensive going to Hong Kong (U$51,595 psm) and the most competitive going to Kuala Lumpur ($3,363 psm).

“Despite much hang-wringing by economists and analysts alike, the worst-case scenario for markets has not materialised. At the time of writing, equity indexes have rallied to a series of records while volatility has fallen to multi-decade lows as investors shrug off potential headwinds. This optimism is reflected in the findings for our Julius Baer Lifestyle Index this year which registered higher valuations on improved consumer sentiment and economic conditions in Asia,” it said.

A sense of perspective
In its preamble, the report’s authors seek to counter some of the standard narrative of people fearing that the days of relatively fast economic growth seen in recent decades are over. 

“The data tells a different story, however. Succinctly, the world has never been in better shape, especially when economic output is measured on a per head basis. In fact, work done by researchers at the University of Groningen makes this point in dramatic fashion by constructing very long-term times series. They argue that for centuries prior to 1800, humanity had seen little growth. However, from 1945 onwards, that growth rate began to surge,” the report’s authors say.

The report tries to answer its question that if the world has been so wealthy, where does the “doom and gloom” in some political circles come from? It replies by noting that in the US, where some indicators suggest the economy is booming, there is also a split between people in full-time jobs and those that work one or more part-time jobs, the latter being the cheaper option for employers. “This duality in the labour market is visible not only in the US, but is also notable in Japan and Korea, among others. In short, the US jobs recovery has been tinged by the persistence of part-time or irregular jobs, as opposed to full-time work,” the report says.

“In the US alone, there are over five million people who are working part-time jobs but want full-time positions. Some observers now worry that the global labour market has endured a structural break whereby sought after full-time jobs with higher job security and other benefits are scarcer in favour of part-time work. While this may be good for some, it is certainly not for all. In general, dual labour markets are an impediment to growth. This is because part-time workers are unable or unwilling to make investments (such as buying a home) as financial commitments often require the knowledge of a relatively more secure and stable income,” the report says. 

 

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